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From The “You’ve Got To Be Kidding Me” Department, Golf Cart Edition…

October 24th, 2009 · 6 Comments
Incentives · Policy

I’ll start with a brief history lesson, which is basically a parable on unintended consequences…back in the 1980’s, the U.S. imposed “voluntary export restraints” (yes, the word voluntary in there is meant to be ironic) on Japanese cars. (Actually, the export restraints were placed on a number of different countries, but the one on Japan was the most limiting.) Specifically, the restraint limited the number of cars that Japan could send to the U.S. to 1.68 milllion vehicles per year. (This number fluctuated a bit over time, but you get the general idea.) This restriction was similar to a tariff in that it made Japanese cars more expensive in the U.S. than they would have been otherwise. (There’s no point in lowering your price to sell more cars if you aren’t allowed to send more cars over to sell, so prices on Japanese cars were artificially high. And I don’t mean higher by a little bit- if I remember correctly, the price premium estimates are in the $2000-$3000 range.) I point out this historical scenario because it led to a number of presumably unintended consequences:

  • Japanese auto manufacturers started focusing more on high-end vehicles for sale in the U.S., since if you are limited in unit quantity rather than in total value it makes sense to send the products with the highest profit margin.
  • SUVs started to become popular during this period- in the 1980’s, the Sport Utility Vehicle was a new enough concept that people didn’t really know how to categorize it. Not surprisingly, the Japanese manufacturers of these vehicles wanted to call them trucks, since only cars were subject to the export restraint. Therefore, in a way, you can thank Reagan for the proliferation of the soccer-mom gas-guzzlers.
  • It caused Japanese automakers to open factories in the U.S., since the vehicles assembled domestically were not subject to the import quota. (I suppose it’s unclear whether this consequence was truly unintended, but I doubt the thought process was “hey, let’s put this restriction in place so that foreign companies open factories here.”)

While all of these points are arguably interesting, it is the second of these that I want to highlight, since it seems to be a recurring theme. And why shouldn’t it be? People get really good at gaming the system when it suits their interests to do so. For example, Ford can barely keep its head above water, but it can figure out how to avoid an esoteric tariff known as the “chicken tax”:

Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.

In a nutshell (or perhaps an eggshell), things categorized as “delivery vans” are subject to a 25% tariff if they are produced overseas. So of course the correct answer is to produce something such that it is not categorized as a delivery van. This is where the seats and such come in. But since the vehicle is most useful as what it is intended to ultimately be, namely a delivery van, the seats are really not helpful, so they are taken out before they are sold. This serves Ford’s private incentives, so it is performing “properly” according to the rules of the game. That said, it’s a little sad that government policy actually encourages the destruction of capital. (I can only imagine that the parts taken out of the vans are scrapped/recycled rather than sold because the price that Ford could get for the parts versus the steel itself doesn’t make it worth the effort.) In most cases, policy is *intended* to better align the welfare of individuals and of society, but in this case the rule actually drives a wedge between the two. (No matter how hard you try, and how many job creation arguments you think you can make, you can’t create value by destroying well-functioning capital. I promise.) In case you were curious, Ford acting in this way not only benefits Ford but also benefits its customers since it can offer the vehicles at a lower price than it could if it had to pay the tariff. It also benefits the people making the seats and windows I suppose, since they get work…but the government loses since it doesn’t get its money. Don’t think, however, that the avoidance makes the tariff ineffective- avoiding the tariff is expensive, so overseas competition is at least partially thwarted even if the government isn’t able to collect any tariff revenue.

Now, I promised you golf carts in the title, and golf carts you shall have. And you will have them cheaper than they should be, since the government has decided to subsidize them. I wish I were kidding, but no. From the Wall Street Journal:

The golf-cart boom has followed an IRS ruling that golf carts qualify for the electric-car credit as long as they are also road worthy. These qualifying golf carts are essentially the same as normal golf carts save for adding some safety features, such as side and rearview mirrors and three-point seat belts. They typically can go 15 to 25 miles per hour.

I wish you could see the steam coming out of my ears right now. Apparently there is a tax credit of $4200 to $5500 for the purchase of an electric vehicle. Is it really so hard to sit for a few minutes and think “Hm…what might we want to be careful to exclude so that we avoid paying for ridiculous items that make us look foolish?” Perhaps the politicians just all wanted their free golf carts.

Now, maybe you’re thinking “ok, that’s a little silly, but at least the demand for golf carts is putting people to work in that industry.” This is a true statement, but the reality of the matter is that taxpayer dollars are being used to artificially divert resources to making golf carts rather than making things that are objectively more useful. I’m now picturing a highway filled with golf carts, golf carts used in place of tanks, etc…and, while visually humorous, I don’t think anyone believes that that is the best direction for society to head in.

In case you were wondering what my mental image looked like:

The electric vehicle subsidy in theory is not a terrible idea- *if* electric vehicles are better for society than are traditional vehicles, the subsidy can serve to overcome the selfish incentive to focus exclusively on those private benefits and costs that result in the purchase of vehicles that pollute like mad. (I said “if” because the creation of electricity has its own environmental footprint, and I don’t want to assume that something is better just because that conclusions seems intuitively reasonable.) So I suppose my policy position is: A for effort, but is it better to do nothing or to try to do something good and muck it up? Oh, and I don’t want to have to pay for some old dude in Dockers’ golf cart. If you want to call golf a sport, the least you can do is walk from one hole to the next. 🙂

Oh wait…it all makes sense now…

But shhhhhh, don’t tell anyone, k? I’ve got a good thing going here…

Hee.

Tags: Incentives · Policy

6 responses so far ↓

  • 1 Carell Ocampo // Oct 24, 2009 at 8:48 pm

    Greetings!

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  • 2 Frederick // Oct 25, 2009 at 12:04 am

    So that’s why I’ve owned 6 Nissan’s in the last 28 years, though most have not been expensive!! However, I am still fond of my ’56 Ford Victoria Convertible. Good article.

  • 3 Terry Donahue // Feb 2, 2010 at 4:25 pm

    Need a golf cart? Check us out

     bigdogcarts.com

  • 4 Used Golf Carts Guy // Mar 31, 2010 at 1:25 am

    I agree that subsidizing electric vehicles is a good idea, but I’d question how suitable electric golf carts are for public road use. A golf cart will have limited appeal for the masses as they are more of a niche.

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